Dear Inflation - Please keep doing the "Limbo" and get low, get low, get low.. !

Well, well, well, folks, don your party hats and break out the disco balls! Because last week saw interest rates doing a nifty little dance move we like to call "Improvement!" So, dust off your reading glasses and let’s dive into what went down, and peek a little into the crystal ball to see what the future holds.

Ladies and Gentlemen, Keep Your Receipts - Prices Are On A Diet!

The star of our show last week was the Consumer Price Index (CPI) for June, strutting on stage Wednesday and flashing some delectably lower numbers. Looks like consumer prices have decided to go on a diet, and I tell you, that’s news that has the interest rate-sensitive housing sector popping the champagne! The headline CPI for June, which bundles in food and energy, sauntered in at a lean 3% year-on-year. That's the slowest we've seen since we last saw Harry Styles sporting a buzz cut, back in March 2021. When we compare it to last year's rather chubby CPI readings of over 9%, it's like the nation has been on a financial Biggest Loser.

Little Note: This considerable waist-slimming is mainly because oil prices were sashaying around $70 in June...nearly half the size of last June's rather rotund price tag. This just goes to show how crucial it is to keep oil prices hitting the gym.

Feeling the love from these svelte numbers, Core CPI, which takes out food and energy from the equation, also lost more than the market had predicted. This fitness frenzy kicked off a wild shindig in the bond market, with the 10-yr Note yield taking a quick tumble from the lofty heights of 4.09% to a rather more relaxed 3.83%.

Feds Start to Sing a Different Tune

Tickled pink by the delightfully petite inflation figures, some Fed members have already started whispering sweet nothings about inflation nearing "normal levels". In contrast, others are going as far as suggesting that we might be nearing the last call for rate hikes. Now, this is music to our ears, considering just a couple of weeks ago they were practically yelling for more hikes and holding the interest rates hostage.

After the confetti was swept and the punchbowl emptied, the markets are only expecting one more "raise the roof" moment at the end of July. But as we know in this rollercoaster ride of rates, the plot can always thicken.

Are We Out of The Woods?

While Taylor Swift may have left the woods, we haven't quite yet when it comes to inflation. Despite the good news, we might see the CPI playing the yo-yo game in the next few months. The main suspects? Those sneakily low inflation readings of last July and August that might soon be replaced with figures that have had a few too many cupcakes.

Looking ahead, the price of oil might become the gate-crasher at our low-inflation party. If it decides to creep higher than its recent low-key stance, we could see inflation turning into a bit of a party pooper, much like it did last summer. With production cuts looming from OPEC and Saudi Arabia next month, oil prices might be gearing up to play party spoiler.

The Nifty Number – 4.09%

This 4.09% number is like the bouncer at the club door, preventing rates from getting too high and unruly. Since last November, it's been that steadfast figure, but if the 10-yr yield dares to step above it, we might see Treasuries and mortgage rates making a beeline for the sky. The silver lining? The past week saw the 10-yr yield bounce off 4.09% a few times before deciding to come back down to the party.

Bottom line: We're witnessing inflation acting like a well-behaved guest, trending lower. As long as it keeps up this polite demeanor, we might just see interest rates deciding to follow suit and take a chill pill.